Debatable promises and realities of globalization

Wayan R. Susila ,  Jakarta   |  Tue, 06/17/2008 10:05 AM  |  Opinion

After struggling for more than seven years (since 2001), the "Doha Round" will recommence this June with a ministerial meeting in Geneva. Representatives from around the round have promised to come to the negotiating table with renewed energy, and more flexible and compromising positions.

Previously, various issues including agriculture, non-agriculture products, services, special and differential treatment, intellectual property rights and trade facilitation have been on the meeting's daunting agenda.

Also daunting is poverty alleviation which has become the heart of the Doha Round due to its far-reaching consequences, especially in developing countries. Half of the world (nearly three billion people) live on less than US$2 a day, and around 1.1 billion live in extreme poverty on less than $1 a day.

While in previous rounds, including the Uruguay Round, trade liberalization (or fairer trade) was an objective, the Doha Round places trade as a means, and development (including poverty reduction) is its objective. For this reason, the Doha Round has been labeled the "Doha Development Round" (DDA).

With poverty levels at around 17 percent, and a poor population of around 40 million, Indonesia should be able to take advantage of the upcoming DDA meeting. Developing countries will have wider room to protect their national interests using the argument of poverty alleviation. Having said this, it seems pertinent to question; can developing countries including Indonesia really make use of trade liberalization and the DDA to alleviate poverty?

Many studies have been made to assess the links between trade liberalization and poverty. Due to differing schools of thought, method, assumptions and states of development in regions/countries studied, the results have been varied, not only in the magnitudes of the relationship, but also in direction.

With a divergence of results, however, we can classify the studies into two main groups; first, those supporting the poverty alleviation effect of trade liberalization, and second, those questioning the role of trade liberalization in poverty alleviation.

The findings of studies conducted by the World Bank and the Asian Development Bank, to different degrees, found for example that trade liberalization has had positive impacts on growth, which has lead to a reduction of poverty. The general logic behind these findings was that trade liberalization would improve production and market efficiency, leading to a positive net benefit/surplus in the world market. This net benefit would induce economic growth and, to a certain extent, reduce poverty.

For example, a study by the World Bank stated that 24 developing countries with increased integration into the world economy had made more improvements in terms of incomes, life expectancy and education. These countries, home to some 3 billion people, enjoyed an average 5 percent growth in per capita incomes in the 1990s, compared to 2 percent growth in rich countries.

Many of these countries, such as China, India, Hungary and Mexico, have adopted domestic policies and institutions which have enabled people to take advantage of global markets and have thus sharply increased the share of trade in their respective GDPs. Populations in these integrating countries saw wages increase, and numbers of people living in poverty decline.

Anderson, K (2004) in Agricultural Trade Reform and Poverty Reduction in Developing Countries shows the magnitude and the distribution of the monetary impacts of trade liberalization on developed and developing countries. The total impacts were estimated at around $254 billion, with agriculture contributing $164.7 billion. Developing countries would gain 42.7 percent of the total impact.

The full liberalization of OECD farm policies would boost the volume of global agricultural trade by more than 50 percent, but would cause real international food prices to rise by only 5 percent on average. Most developing countries and households would be better off in terms of some poverty indicators such as income and food security.

Despite these estimates and positive findings, many studies show that trade liberalization has had the opposite effect in other countries. In other words, not all countries have integrated successfully into the global economy, as some 2 billion people -- particularly in sub-Saharan Africa, the Middle East and the former Soviet Union -- live in countries which are being left behind. On average, these economies have contracted, poverty has risen and education levels have risen less rapidly than in more globalized countries.

Thus, evidence on the impacts of trade liberalization is mixed at best. Open markets are neither inherently good or inherently bad for poverty reduction.

The impacts of trade liberalization on poverty levels depends on many factors, such as the initial distribution of income and assets, the competitiveness of national producers, and the products produced, bought and sold by the poor.

Some countries, like Haiti, Peru, Mali and Nepal, have opened their markets most rapidly and deeply, but have poor records in poverty reduction.

Meanwhile, countries which have been among the most successful globalizers, such as China, Vietnam and Uganda, have aggressively promoted exports while carefully managing imports, and have achieved impressive results in poverty reduction.

There is now less confidence in that the mainstream trading system can help the poor. It is believed that the global trading system is still very much biased against the poor. An average poor person faces twice the level of trade tariffs than the average rich person. Based on the data available from cross-country comparisons, it is hard to defend the view that trade openness is, in general, a powerful force for the reduction of poverty in developing countries.

From all these debates, we may infer two main conclusions. First, the impact of trade liberalization on poverty alleviation is still very much debatable or is mixed at best.

Second, with this argument in mind, the expectation to reduce poverty in Indonesia using a trade liberalization approach (only) is also highly debatable. And, if Indonesia can draw economic benefits from the DDA, the government needs to be able to transfer these benefits to the poor through various distributional policy instruments.

The writer is a trade economist at Indonesian Trade Assistance Project-USAID. He can be reached at wsusila@chemonics.com

Copyright © 2008 The Jakarta Post - PT Bina Media Tenggara. All Rights Reserved.